[Podcast] Will inflation and rising interest rates put an end to our booming economy? With Dr. Andrew Wilson

According to the latest statistics from the ABS, our economy is roaring along.

The most recent data, which unfortunately is backward looking to the June quarter, showed that as Aussies were released from their lockdown shackles, we spend more on ourselves, growing the economy strongly.

But since then, the Reserve Bank has raised interest rates and will likely continue doing so, so will this kill a booming economy, and what will it do to our property markets?

That's what I discussed in today’s podcast with Dr Andrew Wilson, chief economist of My Housing Market.

The effects of inflation and rising interest rates

If you're a regular listener to this podcast, you would know that each week I have a Property Insiders chat with Dr Andrew Wilson, Australia’s leading housing economist, on YouTube.

And today, I want to play the audio of one of our recent chats here for you on my podcast.

But before I do, I'd like to give you some context.

I know the media is still full of talk about rising inflation and higher interest rates and what these will mean to our housing markets.

While there are many factors affecting our housing markets, and interest rates are only one of them, I still believe the extent to which the RBA will hike rates to cool inflation will be a key determinant of conditions in the housing market this year.

And in large part, this has to do with consumer confidence, which is one of the biggest drivers of our housing market.

So will inflation continue to run hot, forcing the RBA to hike further?

Or are there already signs that some of the contributors to higher inflation may be easing, allowing the RBA to take a foot off the accelerator?

The Australian economy continues to track better than expected, with second-quarter GDP data showing the economy is growing at a robust pace.

While the expansion was broad-based across spending, income, and production categories, a lot had to do with consumers spending their savings, so moving forward, much rests on the consumer and whether households will continue to spend as rate rises are absorbed in their budgets.

This month the RBA continued its hiking cycle, lifting the cash rate at its September meeting.

In a statement following the September decision, RBA governor Philip Lowe said the board remains committed to overcoming the challenge of high inflation and preserving credibility concerning their 2-3% inflation target, ensuring that inflation expectations remain anchored.

But what does this mean for home prices?

Well, the fastest rise in the cash rate since 1994 has seen home prices weaken across the country, with prices nationally falling around Australia, but despite recent falls, prices are still significantly above their pre-pandemic levels.

Regional areas remain up almost 50% since March 2020.

Capital city prices are up 26% over the same time.

As borrowing capacities are constrained, and buyers’ budgets shrink, the most expensive markets of Sydney and Melbourne are leading price declines.

September’s rate hike will further increase borrowing costs and reduce maximum borrowing capacities, pushing property prices down further.

But that doesn't mean property values will drop 20%.

It just means that buyers are going to be looking in different locations or maybe looking at an apartment townhouse or villa unit rather than a house.

In my mind, it is low consumer confidence that he’s holding buyers back and stopping sellers from putting their homes on the market.

This will only return once it appears that we have inflation under control and interest-rate to reach its peak.

This is likely to be early next year.

As I explained, the lagged effect of rate rises, the large share of variable rate borrowers ahead on repayments, and borrowers on fixed terms yet to expire means many mortgage holders have not yet felt or are only now beginning to feel the impact of the initial rises.

1. According to the RBA, around 60% of all borrowers currently have variable-rate loans, and some 40% of those borrowers will have seen no increase in their monthly payments whilst the cash rate was still below 2%.
2. Another substantial portion of borrowers will so far have been insulated from these initial increases in interest rates, given fixed rate home loan take-up surged through Covid.

All up, it suggests there is a significant portion of borrowers who will only just be starting to feel the impact of higher interest rates or who are still yet to.

Interview with Andrew Wilson

Household savings as a source of economic strength

ABS data published last week revealed Australia’s economy grew by 3.6 per cent in annual terms over the three months that ended June 2022.

The strong result, substantially higher than long-term averages, was largely driven by higher household consumption and strong exports.

A massive number of Australians spent their lockdown savings on holidays and eating out, which drove above-trend economic growth over the June quarter.

Australians are rapidly spending more than $250 billion in savings they stashed away during COVID-19 on everything from holidays to cafe trips and lots of new clothes to wear on their outings with friends.

But with inflation at a 30-year high and the rising cost of living and higher interest rates starting to eat into household budgets, the economic outlook is souring.

Of course, that’s what the RBA wants.

The RBA predicts GDP growth will slow to 1.8 per cent in annual terms by the June quarter in 2024 – which is roughly half of the current rate.

Also, in the last week, Reserve Bank Governor Philip Lowe hinted he’s ready to take one of his feet off the brake pedal until it’s clearer whether the RBA’s five straight interest rate rises are having the desired effect and slowing the economy.

That means more rate rises are coming, but possibly smaller ones than the double doses handed out in the past few months to try to rein in runaway prices.

As expected, the RBA raised the official cash rate by 50bps to 2.35%, the fourth consecutive 50bps increase.

The cash rate is now within the realm of neutral and is at its highest level since December 2014.

But this isn’t the end of rate rises.

Links and Resources:

Michael Yardney

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Dr. Andrew Wilson, Chief Economist My Housing Market

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Some of our favourite quotes from the show:

“No one knows exactly what a neutral rate is.” – Michael Yardney

“One of the factors that we keep an eye on is home lending because it’s a leading indicator. When people get their finance preapproved, they’re clearly looking for property. And home lending fell over the July period.” – Michael Yardney

“Rather than shortening our work hours, instant messaging, emails, our smartphones, and the 24-hour news cycle just seem to have made life more frantic.” – Michael Yardney

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